Yesterday, I wrote about Lehman Brothers’
Neuberger is quite a catch
In 2003, Lehman paid $2.8 billion for Neuberger Berman in a cash-and-share deal. Today, analysts believe the unit could be worth $8 billion to $10 billion. (For reference, Lehman’s market capitalization fell below $10 billion today, while fund manager Legg Mason’s
In other words, since the acquisition closed almost five years ago, the value of the Neuberger franchise has more than tripled (note that Neuberger’s value creation is somewhat overstated, as Lehman contributed some of the assets under management when they combined) while Lehman shares have lost more than half their value. Understandably, that discrepancy is a sore point for the 30 top portfolio managers who received substantial Lehman share packages with a long-term lock-in. Those key executives would now require sizable guarantees from a buyer, effectively reducing the consideration Lehman can expect to walk away with.
Neuberger is one of Lehman’s crown jewels -- a superb business that delivers a dependable earnings stream. The acquisition has exactly fulfilled Lehman’s ambition to diversify its earnings away from its dominant fixed-income activity. (No wonder Blackstone
Does Lehman have an endgame?
Naturally, Lehman is now reluctant to part with this jewel out of duress (potential buyers must see this as an extreme buying opportunity). Alas, it doesn’t have a noncore asset in its back pocket like Merrill’s
Furthermore, massive repeated capital raisings from Lehman and other banks such as Morgan Stanley
Lehman has managed to string the market along so far (albeit with a heavy toll on its share price), but as speculation rises concerning possible losses in the third quarter, the firm appears to be running out of options very fast.
When you conduct your affairs imprudently, you may ultimately be forced to make difficult decisions to repair the damage. The longer you wait to make those decisions, the narrower your set of choices. Those hard truths are looming like a freight train in front of Lehman and there’s no getting out of its way.
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Alex Dumortier, CFA, has no beneficial interest in any of the stocks mentioned in this article. Legg Mason is a Motley Fool Inside Value pick. The Fool owns shares of Legg Mason. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.